Petroleum Policy

5. National Oil Companies

NOCs now play an important role in the international oil and gas industry. Similarly, there has been research into the role of junior oil companies and their effectiveness, particularly at the exploration stage, where they are assumed to have an advantage. However, the complex and dynamic ways in which extractive industries players respond to exploration, development and production activities are still too often shrouded in myth and simplistic generalities. This can have negative effects on the design of effective public policies in an area in which a long-term view is essential for governments to take in their role as custodians of finite and, in most countries, publicly owned resources.

The way in which companies obtain access to new reserves helps to illustrate this point. Exploration activity is not the only way companies gain access to reserves. Oil and gas companies routinely buy and sell their interests through mergers and acquisitions (M&A). The buyers are often NOCs from countries with insufficient domestic resources such as China and India. In 2010 alone upstream M&A activity jumped 33% in value from 2009, reaching US$183bn. Cash-rich NOCs from China and South Korea played an important part in that activity. In 2012 one of China's largest oil companies, China National Offshore Oil Corporation (CNOOC), purchased the Canadian company, Nexen, for US$15.1bn. It thereby acquired 900 million barrels of oil equivalent (boe) of proven reserves and 1,222bn boe of probable reserves, plus contingent reserves of 5.6bn boe, mainly in Canadian Oil Sands. At virtually the same time, another Chinese company, Sinopec, acquired a 49% equity interest in Talisman Energy's UK operations for US$1.5bn.

NOCs versus IOCs

For an international oil company (IOC), this kind of a sale to an NOC (or other) buyer can represent a way of raising funds for new projects, but it can also be a way of generating a return from selling an asset that has been created by identifying commercially viable reserves. Its market value is derived from its future production potential. As the project matures, the share value increases and a sale follows. This kind of IOC has a different business model from that of better-known integrated oil and gas companies (e.g. Exxon Mobil or Shell) and instead of producing oil from a successful exploration effort to realise a steady stream of available cash to return to its shareholders in the form of dividend payments, it sells the asset at an early stage. In this way, it avoids the complexity of bringing a large find into production, drawing upon large upfront investment and often requiring a joint venture structure to finance the development. Other IOCs may choose to produce any reserves that they have themselves found, just as they may acquire new projects to gain access to the reserves they contain and thereby increase the volume of reserves under their control without having discovered them in such cases.